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Monday, 19 September 2016

Sydney completions lag

Supply response

If there's a subject that I get more emails about than anything else it's the supply of new apartments in Sydney.

When prices take off you should generally expect a supply response as more projects become viable, until eventually the new supply kills the up-cycle.

And after a period of under-building you only need a working pair of eyes to see that this is taking place in Sydney.

But instead of drawing conclusions based on emotions or pre-determined 'crashnik' conclusions, let's take a look at what the actual numbers say to see whether we can draw some more specific inferences.

Approvals boom

The first thing to note is how far approvals are tilted towards the multi-unit sector in Sydney today, partly as a result of the constrained supply of land close to the city and the Pacific Ocean.

There were some 55,458 approvals over the year to May 2016 - almost double the level of three years ago - and almost exactly two-thirds of these were multi-units at 66 per cent.

When looking at the individual LGAs the most striking point of note is just how many approvals there have been in western areas such as Camden, Blacktown, Parramatta, and Liverpool, as well as in the increasingly populated Hills District.

Incidentally, the Sydney LGA actually covers an enormous area and more than thirty inner ring suburbs, so it's generally expected that there would be the highest number of approvals in that LGA.

When the weight of new apartment supply hits home there is likely to be fallout in some of these western suburban localities.

It's also noticeable how remarkably few approvals there have been in some of the blue chip LGAs such as Mosman, Hunters Hill, Manly, and Woollahra.

Completions lag

If the impact of the supply response has been muted to date, then the next chart explains why.

Despite a 21 per cent year on year increase in annual approvals, annual net dwelling completions have increased by only 3 per cent to 30,901 in the year to May 2016 (with a slightly lower 62 per cent of these being multi-unit dwellings).

While this is an improvement in completions of about one third over the past three years, it needs to be acknowledged that the Greater Sydney population growth is now tracking at about ~85,000 per annum (while the cyclical low for completions in 2009 was cataclysmically bad, and the lowest nadir since 1953).

This implies that as I have concluded here previously the ratio of dwelling completions to population growth in Sydney was still tracking at below its long run average at least until 31 May 2016.

And although population growth in Sydney is higher today than it was in the past, there have been 10 years since 1950 where more net dwelling completions were notched up than there were over the past year.

A prime reason for the supply response being slower than through preceding market cycles is that multi-unit projects on brownfield sites requiring land remediation take a great deal longer to complete than turnkey detached housing developments on greenfield land.

The number of net dwelling completions remains almost comically low in the blue chip LGAs of the eastern suburbs and lower north shore - with NIMBYism clearly alive and well - but supply is starting to hit its straps in some of the aforementioned higher-density LGAs.

Where the pipeline will hurt

The widening gap between approvals and completions means that there are more dwellings under construction in Sydney than has ever been the case before in any Australian city.

In particular, there is a concentration risk in play with so many of the dwellings under construction being high-rise apartments.

Take a look at the figures for Parramatta, for example, where there have been 8,646 multi-unit approvals since July 2012 but only 4,946 net dwelling completions.

That's one heck of a potential supply pipeline, with more units due to come online in adjoining LGAs as well.

The wrap

These data lag by a few months, and they show that despite having had relatively little impact to date Sydney's supply response is poised like a coiled spring.

Up until the end of May 2016 net dwelling completions had barely increased from the prior year in tracking at around 30,000.

However, there is a record number of dwellings in the under construction phase, so this will be one data series to watch closely.